What Investors Look for in Your Startup: Insights from 5 Investors and Founders

Featured in the post: Village Capital, Magma Partners, CIT Gap Funds, Manor, Hungry, and Urgently.

Here’s an $11 Million cheque for your startup - go out there and change the world. Whether this investment comes from a venture capitalist or an angel investor, the decision doesn’t come cheap.

Investors don’t come giving you money just because you tout your startup as the next Uber or market your idea as the next big thing that will revolutionize every sector. Not even when you spice it up with ‘blockchain’.

This is what you should understand as a founder or co-founder. Investors are smart and make their decisions after a series of research and considerations. Many of these investors have poured money into a lot of early-stage ventures. They’ve seen what works and what doesn’t, and your startup might just be one of the ventures that don’t survive their first or second year in business. You can’t blame them, after all, data says only 56% of startups make it to their fifth year.

That’s why it’s hard to raise capital for your startup these days. The road to a cheque from an investor is a conversation that circulates the startup ecosystem all the time. Like any entrepreneur looking for capital out there, one basic question always comes to mind:

Does my startup has what it takes to be funded?

This depends on a lot of factors...

There are series of funding vehicles that cater to different startups at different states of the growth process. Some funding vehicles focus on high-impacting projects, others focus on projects run by minority groups including women, among many others.

Essentially, investors look for highly impactful value proposition in every startup no matter its stage. As a startup, the best way is to check your readiness for investment, the stage of your startup (growth, maturity, or expansion). This exercise helps you determine whether your startup has what it takes to be funded, and which type of funding to go for.

Marco Rubin, Senior Investment Director at Center for Innovative Technology (CIT).

At Startups Ignite, this is one of the biggest questions that come up during our cohorts and meetings. So we sat down with founders and investment experts from Village Capital, CIT GAP Funds, Manor, and Hungry, to discuss the qualities that investors look for in a startup before investing their hard-earned money.

1. A visionary & dynamic team

One of the most important features that investors look for in your startup is your team. As a startup, you should be able to gather a business co-founder, probably as the CEO, an engineering co-founder, as the CTO, and a salesperson, to start with. This is a great way to show dynamism in your team.

Before you get to revenue, one thing any investor would look at is your team. And so it’s very important to have one other founder with a differentiated skill set and that both of you are really locked in on solving the same problem.

Peter Lundquist, VP of Product at Village Capital.

Another thing you have to note as a startup is that times have changed and many investors now put more effort into the team beyond dynamism. Some important questions that investors look for answers to in your team include:

• The level of motivation of each team member towards the product or service you’re offering and how well the team is ready to leverage that for progress.

• How much time is the team dedicating to the project? Do you have some team members working part-time in the startup while doing their day jobs?

We look for well-balanced teams, with some amount of traction, who have skin in the game, and an unfair advantage when we're looking to invest in startups. We want to back founders with complementary skill sets, who have shown they can generate some kind of traction (could be sales, a prototype, a letter of intent) and are the best people in the world to be solving this problem, which means they have some sort of unfair advantage. The best founders we've backed have these qualities.

Nathan Lustig, Managing Partner at Magma Partners.

While ideas matter when funding startups, what investors look for most of the time is the people behind the idea. That’s because the zeal of the team towards the idea, together with other factors, determines a failing early-state venture from a successful one.

2. Have a product or service to show

While you may have a killer idea, investors are most interested in how far you’ve gone with your product or service. As a startup, you need to build traction for your product or service. Before you go to an investor, you should have proof that there is demand for your product, and if possible, you might have already somehow penetrated your target market. Essentially, investors prefer startups that have a “proof of concept”.

As a young company, you should build your product. If you’re thinking “I’m going to raise money to build my product”, that doesn’t happen. You have to get some early traction and people around your project. And you also need to demonstrate that there is a product-market fit for an investor to look your way.

Ric Fleisher, Chief Operating Officer at Manor

3. The effectiveness of your money-making machine.

If you want investors to look your way, you have to figure out how to make money as quickly as possible. Investors love startups that have found a way to turn a Cent into a Dollar.

For investors, making money or profitability as a startup goes beyond just having a forecast of your revenue stream on paper. You should be able to show investors what you’ve done to generate revenue as quickly as possible.

Every business that you start, get sales quickly. You have to get to revenue as fast as you can because the moment you get to revenue, all the funding doors open up really quick.

Founder, Chief Operating Officer at HUNGRY

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4. Knowledge of your market and competition

Another great feature investors look for in a startup is how well you know your market and the competition. Beyond that, investors look for startups that equally have a clear-cut strategy to penetrating their market and outsmarting the competition.

As a startup team, you should know your market very well, the problem that your target demographic is facing, how your idea is solving that, and what your competitors are doing that makes you think you will win the game. And your ability to clearly communicate that to any potential investors is absolutely critical.

Lokesh Kumar, Co-founder & VP of Tech at Urgent.ly.

An equally important factor to note here is that investors look for teams that do not try to hide the facts in their industry. As a startup, you should be open to investors about the challenges in your industry while showing that you have a strategy to overcome them. These market and industry challenges, together with the competition, should be woven into your startup’s business and growth strategy if you want investors to come in.

Please watch the full video of our Innovation Demo Day Investor Panel below.

Video shot by @onecityent